Stock market crashes are a social event where external economic phenomena collaborate with crowd behavior and psychology in a way where selling by some market participants drives more selling pressure leading to a major correction in the prices.
Crashes usually happen under different conditions. A stock market crash is almost always accompanied by an economic slowdown. However, a stock market rally might not always indicate an upsurge in economic growth.
However, generally in the market trends, a prolonged period of rising stock prices and excessive economic optimism usually leads to a slowdown period. This is the scenario in a market where Price-Earnings ratio exceed long-term averages, and there is big use of margin debt and leverage by market participants. A stock market crash which follows this market trend is the outcome of the rise of stock prices as corporations compete against other corporations.
The most prominent cause in such cases is overvaluation, many stocks run ahead of their basic values, so a correction is expected. This is the condition for which Warren Buffett’s famous quote works “Be greedy when others are fearful and Be fearful when others are greedy.”
Example of this is the stock market crash of 2019:
Marco economic causes such as rising petroleum prices, currency depreciation, IL&FS fiasco, tightening market situations, hardening of Bond yields, and coupled with inaction on the part of the government or the RBI to retain the inflation coupled with overvaluation of markets led to a slowdown.
While these are the Macro elements driving the markets down, but overvaluation is a big reason for concern. In the recent crash of 2019 (before Coronavirus hit the markets), many stocks had reached sky-high valuations, which needed to be taken to cleaners.
Some of the reasons for it include:
• Rising prices of crude oil
• Dollar getting stronger against the Indian rupee
• Trade wars between US & China
• Defaults of Various Indian NBFCs.
• Lack of Corporate Governance by SEBI.
• RBI credit policy same as before for lending money to other banks.
• Huge selloff by FIIs.
Indian stocks are set to rise further in 2020, according to a Reuter’s poll of equity plans, but those benefits will not be unlimited as fiscal stimulus and simply monetary policy fails to back an economic slowdown.
Where should investors go?
FMCG can be taken as the safest stock in any market situation. Even on the hardest time of the 2008 crash, it was the FMCG stocks which fell less than the index and slowed down. It also registered decent profits.
Coming to the reasons, FMCG is non-cyclical in nature. If the investor takes a close look at the FMCG stocks, there may not be any earnings surprises and also, they can find a pattern in the revenue increase earning. FMCG is one thing in which the individual cannot stopping purchasing even during the time of recession.
There is some measurement to know the survivor in the stock market crash is as follows: -
• Look for a business whose business model is good - revenues are increasing, profits are increasing.
• Businesses are growing from their own profits and are not creating artificial demand by increased loans.
• Make sure these businesses are not debt-ridden
• In case the loan is taken - it is for CAPEX (Capital Expenditure - Plant, Machinery, etc)
• A business that is creating inbound Cash Flows is always a good investment.
• A business which is governed by great corporate governance and sound management is the good one, they are far better than family-run businesses.
It is not assured that FMCG stocks will give good profits even during the time of the stock market crash. Fast-moving consumer goods stocks may fall less than the other stocks and lesser than the index. So, many companies that are backed by the solid business are going to survive well the stock market crash - rather lower prices will be a potential buying chance.
There are various strategies which can help investors to make the most out of the market crash. However, one must be always careful, considering the fact that market is very volatile and uncertain.
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Data presented here is taken from company's inception
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